IN FOCUS: How big is big enough?

London
Source:
This story is sourced from Pro
See more Pro news »

With union-management negotiations looking set to continue right to the end-January deadline imposed by International Airlines Group management for implementation of a plan to staunch losses and "save" its Iberia unit by slashing 4,500 jobs, 25 aircraft and 15% of capacity, leaders across the industry are being advised to consider the delicate balance between scale and scope of operations.

Roger de Peyrecave, UK airline practice leader at consultants PwC, told Flightglobal that while he doubts any airline is likely to grow too large to be profitable - and he believes there are generally benefits, in terms of purchasing power and fleet rationalisation, to be had from greater scale - it is increasingly important to recognise the difficulty faced when trying to achieve scale economies by combining long- and short-haul operations.

Ultimately, says de Peyrecave, mid-sized carriers with a mix of short- and long-haul operations are struggling to stay profitable, in large part because they lack the scale to optimise either part of the business. In Europe particularly, he says, there is a good chance the industry will become stratified, with short-haul specialists - principally low-cost carriers - moving passengers who choose to "self-connect" to long-haul flights at hub airports.

Such stratification allows carriers to optimise their business plan, he notes, for example by running one-type fleets where possible, to maximise flexibility.

But at any scale, the challenge of running short-haul routes to serve as feeders for long-haul flights can be daunting.

Separating short- and long-haul flying makes sense in one critical respect: a short-haul low-cost carrier like, say, Ryanair optimises its routes and schedules without regard for the timetable of any long-haul operator. Carriers trying to run a long-haul and feeder service don't have that luxury, and pay for it in inefficiency.

But even long-haul specialists cannot look to mere scale to save them from high costs because, in this industry, there are real constraints on growth. National regulations barring foreign ownership and favouring flag-carriers restrict growth by merger or acquisition. Such "natural limits" prevent airline companies from becoming the sort of global conglomerates seen in other industries.

A probable exception, says de Peyrecave, are the big Gulf carriers. Emirates or Etihad are exploiting their natural geographic hub position in an attempt to dominate the long-haul trade - and have the added advantage of efficiency, in that their all-new fleets can be optimised around relatively few types suitable to similar routes. But even these carriers, he adds, will still come up against growth-limiting national regulatory barriers in the Americas.

Moreover, in any industry, marginal scale economies diminish with growth. And, it would be unwise to assume that the airline industry is somehow unique in being able to escape the eventual onset of diseconomies of scale, when the cost of managing a huge, far-flung operation starts to rise faster than profits can grow. When it comes to that ultimate breaking cost - fuel - there are few if any scale economies to be had.

Airlines, therefore, may seek growth - organically or by merger or acquisition - as one route to the unit cost reduction needed to maintain profitability. But eventually it will be necessary to control costs without growth, and carriers which fail to do that in the short term may never be able to do it.